In a research note on this week's U.S. petroleum supplies, A.G. Edwards analyst L. Bruce Lanni said refined product margins are likely to keep falling because of "adequate inventories, high operating rates and what appears to be the emergence of slowing demand."

Implied demand rose by 2 percent year to date, but that's down from 3 percent earlier this year, he said.

During the week ended June 15, gasoline supplies rose by as much as 3.7 million barrels, according to the Energy Department, despite an API report refinery production capacity fell saying nearly 1.5 percent fall 95 percent.

Among the oil indexes, the CBOE Oil Index
OIX, -11.39%
a basket of exploration and production stocks, fell 1.1 percent to 328.29. Within the index, shares of Texaco
TX, +2.67%
eased $1.05 to $69.70.

The Oil Service Index
OSX, -1.00%
declined by 4.4 percent to 108.22. Shares of Nabors Industries
NBR, -1.08%
slipped by $1.80 to close at $42.20.

In related energy news, Dynegy
DYN, -1.40%
a wholesale-electricity provider, backed its existing earnings estimates Thursday and said it's decided to buy back up to $250 million of its stock. See full story.

Supply data weighs on gasoline prices

Concerns the U.S. market is well supplied for the summer driving season again pressured gasoline futures prices Thursday.

Crude and natural-gas prices eked out minor gains after posting losses earlier in the session.

Supplies have jumped nearly 27 million barrels since early April when gasoline prices were at an all-time high, according to Fimat energy analyst John Kilduff, who cited "the slowdown of world economic growth" for the rise.

"The market seems to be adequately supplied given the rate of inventory replenishment," he said, even if Iraq retains its halt on oil exports indefinitely. The country stopped exports into the global market on June 4 because of a dispute over a shorter-than-anticipated extension of the United Nations oil-for-food program.

On the New York Mercantile Exchange, July unleaded gasoline dropped to an intraday low at 76 cents a gallon -- its lowest level since December 2000. The contract closed at 77.09 cents a gallon, down 1.94 cents.

August crude rose 8 cents to $26.56 a barrel. July heating oil tacked on 0.09 cent to 74.24 cents a gallon.

SpikeTrading.com energy analyst Kevin Kerr also believes the data points to a slowing economy and a drop in demand, but called the decline in gasoline prices "overdone." "We are looking at possibly buying back into the market down here," he said.

On the production front, there no longer appears to be a consensus that OPEC production will be raised after its meeting on July 3, Kilduff said, as there are some signs that demand might not be what was expected. "For now, the market seems comfortable without Iraqi oil," he said.

Crude prices found support on "comments from varied OPEC sources suggest the cartel will leave production unchanged July 3, if they bother to meet at all," IFR Pegasus energy analyst Tim Evans said.

U.S. inventories of crude oil rose by 1.4 million barrels, or fell by as much as 700,000 barrels, according to divergent data from the American Petroleum Institute and the Energy Department this week.

Natural gas supplies on the rise

A separate on natural-gas inventories report Wednesday showed U.S. supplies rose by 106 billion cubic feet last week, a figure that came in above average market expectations of 90 billion to 100 billion. See full story. Total supplies stand at 1,609 billion cubic feet, according to the American Gas Association.

Additionally, Statistics Canada reported Thursday that Canadian exports of natural gas into the U.S. in April were 213 percent above the year-ago period. See related story.

July natural gas posted minor gains, however, and closed at $3.747 per million British thermal units, up 1.3 cents.

Kerr showed surprise over the relatively quiet trade in natural gas. The market has maintained "good support" and many investors are "staying on the sidelines," he said, "reluctant to get short at least at this point."

But the supply rise is "a clear bearish indicator for the natural gas market," Raymond James analyst Wayne Andrews warned in a Thursday research note, and prompts cause for concern regarding the longer-term outlook for natural gas.

Andrews believes that the negative surprise was due to a curtailment in industrial and electric demand along the Gulf Coast because of Tropical Storm Allison as well as a delay factor related to power plants switching from fuel oil back to natural gas.

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